2 Four Conditions of Perfect Perfect competition is a market structure in which a large number of firms all produce the same product. Many buyers and sellers Identical products Informed buyers and sellers Free market entry and exit Competition
3 Does this picture come close to perfect competition?
4 Many Buyers and Sellers There are many participants on both the buying and selling sides.
5 Identical Products There are no differences between the products sold by different suppliers.
6 Informed Buyers and Sellers The market provides the buyer with full information about the product and its price.
7 Free Market Entry and Exit Firms can enter the market when they can make money and leave it when they can't.
8 What prevents any one firm from raising its prices? Number of Firms: MANY Perfect Competition Variety of Goods: NONE Barriers to Entry: NONE Control Over Prices: NONE
9 Barriers To Entry Factors that make it difficult for new firms to enter a market are Start-up Costs Technology
10 Start-up Costs The expenses that a new business must pay before the first product reaches the customer are called start-up costs. Available land, labor, and capital Money for advestising
11 Technology Some markets require a high degree of technological knowhow. As a result, new entrepreneurs cannot easily enter these markets.
12 Equilibrium Quantity Price Price and Output One of the primary characteristics of perfectly competitive markets is that they are efficient. In a perfectly competitive market, price and output reach their equilibrium levels. Market Equilibrium in Perfect Competition Supply Equilibrium Price Demand Quantity
13 Equilibrium Quantity Price Price and Output What factors allow a perfectly competitive market to reach equilibrium? Market Equilibrium in Perfect Competition Supply Equilibrium Price Demand Quantity
14 Monopolies Chapter 7 Section 2
15 What Is A Monopoly? A monopoly is a market dominated by a single seller. Monopolies form when barriers prevent firms from entering a market that has a single supplier. Monopolies can take advantage of their monopoly power and charge high prices.
16 Forming A Monopoly Market conditions can cause different monopolies to be formed Economies of Scale Natural Monopoly Technology and Change
17 Economies of Scale A firm will enjoy an economies of scale if start-up costs are high average costs fall for each additional unit produced An industry that enjoys economies of scale can easily become a natural monopoly. Public water
18 Why is public water a monopoly? Number of Firms: ONE Variety of Goods: None PUBLIC WATER Barriers to Entry: Complete Control Over Prices: Complete
19 COST Describe the cost for a firm without economies of scale. AVERAGE TOTAL COST OUTPUT AVERAGE TOTAL COST WITHOUT ECONOMIES OF SCALE AVERAGE TOTAL COST WITH ECONOMIES OF SCALE
20 Natural Monopoly A natural monopoly is a market that runs most efficiently when one large firm provides all of the output. Hydroelectric plant that generates electricity from a dam on a river
21 Technology and Change Sometimes the development of a new technology can destroy a natural monopoly. It will cut fixed costs and make small companies as efficient as large firms Phone companies
22 Government Monopolies They are monopolies created by the government Technological Monopolies Franchise and Licenses Industrial Organizations
23 Technological Monopolies The government grants patents, licenses that give the inventor of a new product the exclusive right to sell it for a certain period of time. Patents on new prescription drugs
24 Franchise and Licenses A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market National Parks asking Pepsi to sell within the park
25 Licenses A license is a government-issued right to operate a business Television and radio broadcasts
26 Industrial Organizations In rare cases, such as sports leagues, the government allows companies in an industry to restrict the number of firms in the market. NFL NBA NHL
27 Price discrimination is the division of customers into groups based on how much they will pay for a good. Although price discrimination is a feature of monopoly it can be practiced by any company with market power. Market power is the ability to control prices and total market output. Price Discrimination
28 Discounts Targeted discounts, like student discounts and manufacturers rebate offers, are one form of price discrimination. Price discrimination requires: some market power distinct customer groups difficult resale
29 Price Output Decisions Even a monopolist faces a limited choice it can choose to set either output or price, but not both. Monopolists will try to maximize profits Compared with a perfectly competitive market the monopolist produces fewer goods at a higher price. A monopolist sets output at a point where marginal revenue is equal to marginal cost. Setting a Price in a Monopoly Market Price $11 $3 B A Marginal Cost C Demand 9,000 Output (in doses) Marginal Revenue
30 A monopolies marginal revenue(money made from producing one more unit of a good) is lower than the market price Output must be set at a point where marginal cost equals marginal revenue In a perfectly competitive market, marginal revenue remains the same as price Output Decisions How does this affect output and price compared to a perfectly competitive market?
31 Monopolistic Competition and Oligopoly Chapter 7 Section 3
32 Four Conditions Of Monopolistic In monopolistic competition, many companies compete in an open market to sell products which are similar but not identical. 1. Many firms 2. Few artificial barriers to entry 3. Slight Control over price 4. Differentiated products Competition
33 Many Firms As a rule, monopolistically competitive markets are not marked by economies of scale or high start-up costs, allowing more firms
34 Few Artificial Barriers To Entry Firms in a monopolistically competitive market do not face high barriers to entry. Patents do not protect anyone from competition It includes many competing firms Producers have a hard time keeping out competitors
35 Slight Control Over Price Firms in a monopolistically competitive market have some freedom to raise prices Because each firm's goods are a little different from everyone else's. There is only limited control because consumers will substitute with a rival s goods
36 Differentiated Product Firms have some control over their selling price because they can differentiate Distinguish their goods from other products in the market Firms profit by selling their differences
37 When do firms in monopolistic competition have some control over prices? Number of Firms: MANY Variety of Goods: SOME Monopolistic Competition Barriers to entry: LOW Control over Prices: LITTLE
38 Nonprice Competition It is a way to attract customers through: Style Service Location but not a lower price 1. Characteristics of Goods 2. Location of Sale 3. Service Level 4. Advertising Image
39 Characteristics of Goods The simplest way for a firm to distinguish its products is to offer a new size, color, shape, texture, or taste.
40 A convenience store in the middle of the desert differentiates its product simply by selling it hundreds of miles away from the nearest competitor. Location of Sale
41 Service Level Some sellers can charge higher prices because they offer customers a higher level of service. V.S.
42 Advertising Image Firms also use advertising to create apparent differences between their own offerings and other products in the marketplace.
43 Monopolistic Prices Prices will be higher than they would be in perfect competition firms have a small amount of power to raise prices. Too much competition stops most price changes
44 Monopolistic Profits While monopolistically competitive firms can earn profits in the short run they have to work hard to keep their product distinct enough to stay ahead of their rivals.
45 Costs and Variety Monopolistically competitive firms cannot produce at the lowest price due to the number of firms in the market. They do, however, offer a wide array of goods and services to consumers.
46 Oligopoly describes a market dominated by a few large, profitable firms. Collusion Collusion is an agreement among members of an oligopoly to set prices and production levels. The outcome is called price fixing This is illegal in the U.S. Cartels A cartel is an association by producers established to coordinate prices and production. Every member has to agree to the output levels Each member has a strong incentive to break the agreement Profit motive This is illegal in the U.S.
47 Why are high barriers to entry an important part of oligopoly? Number of Firms: FEW Variety of Goods: SOME Oligopoly Barriers to entry: HIGH Control over Prices: SOME
48 How does a monopolistic competition differ from monopoly? COMPARISON OF MARKET STRUCTURES Number of Firms Variety of Goods Control over Prices Barriers to Entry Examples PERFECT ECONOMY MONOPOLISTIC COMPETITION OLIGOPOLY Many Many A Few Dominate MONOPOLY One None Some Some None None Little Some Complete None Low High Complete Wheat, Shares of Stock Jeans, Books Cars, Movie Studios Public Water
49 Regulation and Deregulation Chapter 7 Section 4
50 Market Power Markets dominated by a few large firms: tend to have higher prices lower output than markets with many sellers Controlling prices and output is known as market power
51 Predatory Pricing To control prices and output like a monopoly, firms sometimes use predatory pricing Sets the market price below cost levels for the short term Drives out competitors
52 Government and Competition Government policies keep firms from controlling the prices and supply of important goods. Antitrust (Anti-monopoly) Laws Laws that encourage competition in the marketplace. Sherman Anti-Trust Act
53 Regulating Business Practices The government has the power to regulate business practices If these practices in question give too much power to a company that already has few competitors.
54 Breaking Up Monopolies The government has used anti-trust legislation to break up existing monopolies The Standard Oil Trust John D. Rockefeller AT&T Became the Bell System Broke AT&T into several different companies
55 Blocking Mergers A merger is a combination of two or more companies into a single firm. The government can block mergers that would decrease competition.
56 Preserving Incentives In 1997, new guidelines were introduced for proposed mergers Gave companies an opportunity to show that their merging benefits consumers.
57 Deregulation is the removal of some government controls over a market. is used to promote competition Many new competitors enter a market that has been deregulated. This is followed by an economically healthy weeding out of some firms from that market Which can be hard on workers in the short term. Deregulation
58 By looking at the graph, why do you think so many banks failed after deregulation in 45% 40% 35% 30% 1980? 25% 20% Bank Failures 15% 10% 5% 0%
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